Can energy security predict energy stock returns?

We hypothesize that energy security contains valuable information that can predict energy stock returns. To test this hypothesis, we construct 10 energy security indexes and nine energy stock returns. We find that, at most, all 10 energy security indexes can predict returns. We further show that the return forecasts generated using the energy security indexes as a predictor are economically significant. A mean-variance investor is willing to pay a maximum of 4.88% per annum in extra portfolio management fees to access the additional information contained in return forecasts generated using the energy security indexes. These findings survive several robustness tests. •We hypothesize that energy security can predict energy stock returns.•To test this hypothesis, we construct 10 energy security indexes and nine energy stock returns.•We find that, at most, all 10 energy security indexes can predict returns.•We show that our return forecasts are economically significant.•A mean-variance investor is willing to pay a maximum of 4.88% per annum in extra portfolio management fees for our forecast information.